02/14/2002 08:06 AM House STA
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= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE STATE AFFAIRS STANDING COMMITTEE
February 14, 2002
8:06 a.m.
MEMBERS PRESENT
Representative John Coghill, Chair
Representative Jeannette James
Representative Hugh Fate
Representative Gary Stevens
Representative Peggy Wilson
Representative Harry Crawford
Representative Joe Hayes
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
HOUSE BILL NO. 10
"An Act relating to the taxation of income."
- HEARD AND HELD
SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 199
"An Act relating to taxation, including taxation of income of
individuals, estates, and trusts."
- HEARD AND HELD
HOUSE BILL NO. 300
"An Act relating to the procurement of certain travel services."
- BILL HEARING POSTPONED TO 2/21/02
PREVIOUS ACTION
BILL: HB 10
SHORT TITLE:INCOME TAX ON INDIVIDUALS & FIDUCIARIES
SPONSOR(S): REPRESENTATIVE(S)MOSES
Jrn-Date Jrn-Page Action
01/08/01 0026 (H) PREFILE RELEASED 12/29/00
01/08/01 0026 (H) READ THE FIRST TIME -
REFERRALS
01/08/01 0026 (H) STA, FIN
01/08/01 0026 (H) REFERRED TO STATE AFFAIRS
02/14/02 (H) STA AT 8:00 AM BUTROVICH 205
BILL: HB 199
SHORT TITLE:INCOME TAX: INDIVIDUALS/TRUSTS/ESTATES
SPONSOR(S): REPRESENTATIVE(S)HUDSON
Jrn-Date Jrn-Page Action
03/19/01 0650 (H) READ THE FIRST TIME -
REFERRALS
03/19/01 0650 (H) STA, FIN
03/23/01 0712 (H) COSPONSOR(S): SCALZI
01/18/02 2002 (H) SPONSOR SUBSTITUTE INTRODUCED
01/18/02 2002 (H) READ THE FIRST TIME -
REFERRALS
01/18/02 2002 (H) STA, FIN
01/18/02 2002 (H) REFERRED TO STATE AFFAIRS
02/14/02 (H) STA AT 8:00 AM BUTROVICH 205
WITNESS REGISTER
TIM BENINTENDI, Staff
to Representative Carl Moses
Alaska State Legislature
Capitol Building, Room 500
Juneau, Alaska 99801
POSITION STATEMENT: Presented HB 10 on behalf of Representative
Moses, sponsor.
REPRESENTATIVE BILL HUDSON
Alaska State Legislature
Capitol Building, Room 502
Juneau, Alaska 99801
POSITION STATEMENT: Testified as sponsor of SSHB 199.
CHUCK HARLAMERT, Juneau Section Chief
Tax Division
Department of Revenue
P.O. Box 110420
Juneau, Alaska 99811-0420
POSITION STATEMENT: During hearing on SSHB 199, answered
questions on that bill and other proposed tax legislation.
NEIL SLOTNICK, Deputy Commissioner
Office of the Commissioner
Department of Revenue
PO Box 110405
Juneau, Alaska 99811-0405
POSITION STATEMENT: Testified regarding SSHB 199.
ACTION NARRATIVE
TAPE 02-10, SIDE A
Number 0001
CHAIR JOHN COGHILL called the House State Affairs Standing
Committee meeting to order at 8:06 a.m. Representatives
Coghill, Fate, Stevens, Wilson, and Crawford were present at the
call to order. Representatives James and Hayes arrived as the
meeting was in progress.
HB 10-INCOME TAX ON INDIVIDUALS & FIDUCIARIES
[Contains discussion of SSHB 199 and HB 413]
Number 0042
CHAIR COGHILL announced the first order of business, HOUSE BILL
NO. 10, "An Act relating to the taxation of income."
Number 0206
TIM BENINTENDI, Staff to Representative Carl Moses, Alaska State
Legislature, presented HB 10 on behalf of Representative Moses,
sponsor. Of the three major proposals [HB 413, SSHB 199 and HB
10], he said [HB 10] would probably be "income tax light,"
generating between $90-$100 million. Its main distinguishing
feature is providing a credit for both personal property taxes
and real estate taxes paid in the state; it is a considerable
deduction, which is one reason the income from [HB 10] is
considerably less than from the other [bills]. He noted that
the bill is fairly conventional in its setup and is basically
modeled on "the income tax that used to be active in this
state."
Number 0314
CHAIR COGHILL asked Mr. Benintendi to describe the basis for the
tax rate and the fundamentals of the tax liability.
MR. BENINTENDI told committee members the bill graduates the tax
- or "brings it in somewhat modestly" - and raises it over the
course of three years. He said if an income tax were chosen,
Representative Moses wanted to "get it in and across as easily
as possible." For example, he noted that for the first year,
[the proposed tax] would tax people at 5 percent of their
federal tax liability if that liability were less than $20,000,
and at 10 percent if it were more than $20,000. In the second
year, it would go to 10 percent for less than $20,000 and 15
percent for over $20,000. He concluded that in the third and
final year, it would be 15 percent for less than $20,000, and 20
percent for over $20,000.
Number 0440
CHAIR COGHILL asked Mr. Benintendi what is meant by "the federal
income tax liability of under $20,000." He asked how he'd
arrived at that number.
MR. BENINTENDI explained that after the taxpayer prepares a
federal tax filing, the liability would be determined on [Form]
1040. If that amount is less than $20,000, then the [5 percent
in the first year, for example] would apply; if it's more than
[$20,000], then the [10 percent in the first year, for example]
would apply.
CHAIR COGHILL said he thought the tax rate was a key issue. He
indicated the word "fiduciary" on page 6 [of HB 10] and asked
Mr. Benintendi how he'd arrived at the definition.
MR. BENINTENDI said beyond having "picked that up from the old
... income tax structure," he didn't know why that was there.
CHAIR COGHILL remarked that a trust doctrine has been created in
Alaska that has given people an incentive to "warehouse money
here." He said, "I just need to know to what degree we're going
to affect that whole scheme that we have been building over the
last several years."
Number 0572
REPRESENTATIVE CRAWFORD asked, if a person's federal tax
liability is $22,000, whether that person would be taxed at the
lower rate for the first $20,000 and at the higher rate for
everything over that amount.
MR. BENINTENDI answered that if a person's federal tax liability
is above $20,000, then the entire amount would be taxed in the
third year, for example, at 20 percent.
Number 0623
REPRESENTATIVE STEVENS, regarding the credit for property tax,
said this is in regard to personal - not corporate - income tax.
He asked, "Is it just your primary home, or is it credit for
people who have vacation homes?" He also asked Mr. Benintendi
to clarify whether the 15 or 20 percent would be taken on the
amount owed the federal government on line 70 of tax Form 1040.
MR. BENINTENDI answered yes to the latter question. Regarding
the former question, he said the intent of Representative Moses'
bill, as presently written, is to give the credit for any and
all personal property taxes paid or real estate taxes paid. He
said, "It's pretty wide-open, and that's one of the features
that draws the income down that would eventuate from the tax."
He noted that the language could be modified to restrict it to
primary residences only; he added, "That's compatible with some
other programs in the state, so there are options there."
Number 0700
REPRESENTATIVE JAMES asked if it was the intent [of the sponsor]
that there be a separate itemized deduction schedule for the
State of Alaska to determine whether there is any income or
expenses from outside the state that would be recognized as a
state tax, particularly on part-time residents or nonresidents.
She also asked Mr. Benintendi if it would be expected that the
federal tax paid would be an itemized deduction, just as state
tax is an itemized deduction [on federal taxes]. She remarked,
"If you didn't do that little calculation, you'd find yourself
having the state tax deduction, which reduces your tax, ... and
it doesn't seem fair to me." She then said:
If we're going to piggyback on the federal tax at all,
I would prefer starting with the adjusted gross
income. The reason for that is there's lots of
playing around with different benefits of credits ...
and so forth, at the federal level, which I don't
necessarily believe Alaska should be buying into.
Number 0800
MR. BENINTENDI said [HB 10] would only tax income from sources
within Alaska. He asked Representative James if that answered
part of her question.
REPRESENTATIVE JAMES replied yes. She added, "We're making the
tax return more complicated, because now everybody has to
separate, and the federal tax doesn't do that."
MR. BENINTENDI admitted "that could very well be."
CHAIR COGHILL noted that the foregoing is in Section 5. He
indicated it would leave that open. He asked Mr. Benintendi to
explain the rationale of starting with the liability instead of
the adjusted gross income.
MR. BENINTENDI said he couldn't explain, other than it was
Representative Moses' preference. He noted that this was the
eighth year the Representative Moses had submitted this bill.
Number 0866
REPRESENTATIVE JAMES stated that she has avidly supported a flat
tax, not a graduated one, because of her experience in working
in payroll a long time ago. At that time, she said, she
witnessed people getting an increase in their [gross] pay but
receiving a smaller check because they were then in a higher
[tax] category. She said people had asked her to calculate what
their incomes would be if their spouse went to work - which
would move them into a higher tax bracket - and if they put
their children into childcare. She said her rationale is: "For
those people who work harder, longer, and smarter, why should
they work for a smaller dollar?"
Number 0935
CHAIR COGHILL offered his belief that a tax credit against local
taxes is good idea. He asked Mr. Benintendi if that would allow
for other exceptions and other credits.
MR. BENINTENDI answered that possibly other credits or
deductions could be applied; however, it's fairly easy to
determine what real estate taxes have been paid in [Alaska]. He
said he thinks the department's estimate of the amount of real
estate property tax paid in the state is $451 million.
According to the department, he noted, the personal property tax
amount is difficult to identify. He said he was not certain
why, but suspected there were different inclusions from
community to community. He added, "They've wrestled with it."
CHAIR COGHILL commented that property tax valuation has
significant effects in other areas of the world, as well.
Number 1019
REPRESENTATIVE CRAWFORD asked Mr. Benintendi if he had done any
calculations regarding "breaking it down from people's personal
residence, as opposed to their rental property that they might
have."
MR. BENINTENDI answered no.
REPRESENTATIVE CRAWFORD said he could see a good reason for
people to get a break on their own residence, but not on rental
property.
MR. BENINTENDI commented that people may have cabins out in the
wilderness, or in other boroughs, for example. He added, "It's
pretty generous, but that's what Representative Moses ... has
wanted all these years."
Number 1060
REPRESENTATIVE JAMES mentioned her own tax bill of four years
ago. She said one of the purposes for her flat-tax income tax
was to "nullify the argument between those people in the rural
areas and the urban areas who do or do not help to pay for their
education." Furthermore, in her tax, if people paid a property
tax on their residence and a portion of that "was for
education," then those people would get a credit; those who
didn't pay a property tax didn't [get that credit].
REPRESENTATIVE JAMES mentioned forcing the boroughs "on these
people so they'll force them to pay" for their education. She
mentioned taking long testimony in the past without ever hearing
a single person say he/she didn't want to pay. She added, "They
didn't have a provision to pay, and I thought, 'That would keep
that.'" Referring to the property tax, she asked Mr. Benintendi
whether [the sponsor] had considered simply making it "the
amount that you pay for education on your personal residence."
MR. BENINTENDI responded that he hadn't heard from
Representative Moses that he'd considered that. He commented
that those areas in rural Alaska that do not pay a property tax
locally, of course, cannot take advantage of the credit
[proposed in HB 10]. He said he suspected that the reason
Representative Moses included personal property tax in the bill
was to "hook in some of those areas that may have personal
property taxes, but not local." He added that he did not know
if there were many of those.
Number 1172
REPRESENTATIVE WILSON offered that many fishermen have homes [on
which they pay] property tax, but have a business on a fishing
boat. In many areas, there is no property tax on that boat, she
said. She asked, "How would that affect the fishermen?"
MR. BENINTENDI answered, "If they pay no property taxes, that
wouldn't affect that nonresidential property, as far as I'm
aware." He explained that if those fishermen were not paying
tax on that boat "out somewhere," they wouldn't be "using the
credit here."
REPRESENTATIVE WILSON said, "So, then, they would have to claim
the boat and then pay the tax on the boat. Is that what you're
saying?" She added, "There's no exemptions. So, ... they just
don't have to count that at all, then? Or that's just a moot
point?"
[An unidentified speaker said, "Uh-hum."]
Number 1230
REPRESENTATIVE STEVENS sought clarification regarding what the
"old tax" was. He said he thought it was 20 percent.
[Several committee members simultaneously offered numbers
between 16 and 18.]
REPRESENTATIVE STEVENS asked for a definitive answer. He said
the more it could be kept simple, the better off it would be.
MR. BENINTENDI said he was guessing from memory that the number
was 18 percent. Regarding Representative Stevens' suggestion to
keep it simple, he said, "Oh, yes, sir."
Number 1275
MR. BENINTENDI, in response to a request from Chair Coghill,
said the anticipated income in the first year, according to the
bill's currently written graduated format, is approximately $2
million, rising to $82 million in the third year. He said those
are estimated figures from the Department of Revenue, which
included "their wrestling with ... the personal-property-tax
side of that issue."
MR. BENINTENDI told the committee that Representative Moses had
changed his mind in one regard: He would like to remove the
graduated feature because he realizes the income is very
"light."
CHAIR COGHILL offered his understanding that the burden to the
individual would be to fill out the federal tax form and submit
it to the state with [the state's] form, "starting at whatever
the tax liability is." He indicated the state form would then
"give them the multiplier - whatever that percentage was."
MR. BENINTENDI said yes. He clarified that people would have to
submit a copy of their federal tax filing to the state, and the
state would retain it in their records for a period of time.
CHAIR COGHILL asked, "Are we going to run afoul of 'how do we
describe a resident [and] nonresident?'"
MR. BENINTENDI answered that he didn't think so. He said
Representative Moses was "most anxious to hook in out-of-state
workers who actually work up here," to have them pay "more of
their way up here." He explained that most of them are
seasonal, tourism and fisheries workers. Under the current
proposed bill, the estimated income from that pool of workers is
less than $3 million - a modest amount, which he said is a
subject for amendment.
Number 1435
REPRESENTATIVE STEVENS surmised that if people earn a salary in
Alaska, they can only be given credit for taxes paid within
Alaska.
MR. BENINTENDI concurred.
Number 1456
CHAIR COGHILL recognized the sponsor's willingness to amend out
the "step up," and indicated that 15-20 percent would [be the
amount of] the federal income tax liability.
Number 1472
REPRESENTATIVE WILSON asked what the total was.
MR. BENINTENDI said under the third tier of the bill as
presently written, the income would be between $90-$100 million
- probably closer to $90 million. He noted that the foregoing
was not "net of the cost of the program." Last year, there was
an estimated administrative cost of approximately $3 million,
whereas, to his understanding, currently it is "up around" $7
[million].
CHAIR COGHILL informed Mr. Benintendi of the comparison sheet
[of the three similar bills] provided by the administration
[included in the committee packet].
Number 1538
REPRESENTATIVE CRAWFORD said he would like to make a conceptual
amendment to keep the property tax "just for personal
residences."
CHAIR COGHILL indicated that before considering amendments, he
would bring a proposed committee substitute of the sales tax for
consideration. [HB 10 was held over.]
HB 199-INCOME TAX: INDIVIDUALS/TRUSTS/ESTATES
[Contains discussion of HB 10 and HB 413]
Number 1609
CHAIR COGHILL announced the final order of business, SPONSOR
SUBSTITUTE FOR HOUSE BILL NO. 199, "An Act relating to taxation,
including taxation of income of individuals, estates, and
trusts."
Number 1623
REPRESENTATIVE BILL HUDSON, Alaska State Legislature, sponsor,
came forward to present SSHB 199. He brought attention to a
chart that he said was predicated upon the most current figures
from the Department of Revenue, the Office of Budget and
Management (OMB), and others. By 2003 and beyond, he noted, the
state is looking at a billion-dollar shortfall in the money
required to balance the books - which there is a constitutional
responsibility to do. He told members:
Working with the fiscal policy caucus, and having been
working on this issue - and, frankly, taking some of
my lead from the majority leader here some years back
- we have put together what we think ... is one
element of a cure - or at least a portion of the cure
- to this fiscal gap, to try to increase the recurring
revenue stream so as to avoid falling off the edge of
that ... proverbial cliff.
REPRESENTATIVE HUDSON pointed out that the Constitutional Budget
Reserve (CBR), which has become the "filler," is expected to
essentially be gone by 2004. When that occurs, the only other
major account available will be the Earnings Reserve Account
(ERA) of the permanent fund. Suddenly, schools, public safety,
maintenance of roads, matching federal money, keeping prisoners
in prisons, and so forth will compete with the permanent fund
dividend (PFD).
REPRESENTATIVE HUDSON told members that according to top
advisors for the permanent fund who'd spoken before the House
Finance Standing Committee two days ago, the entire permanent
fund could be hurt if "we try to feed both dividends and making
up the fiscal gap out of the earnings of the permanent fund";
right now, the ERA levels things out so that there is enough
money to both inflation-proof the fund and pay the dividends.
REPRESENTATIVE HUDSON noted that he'd served on the House State
Affairs Standing Committee for four of his sixteen years as a
legislator. He acknowledged that the committee must first
consider policy, followed by the elements of the policy. He
suggested the chart makes the case for why he is willing to
author legislation regarding such an onerous thing as returning
taxes to Alaska.
REPRESENTATIVE HUDSON reported that he'd had numerous
conversations with former Governor Jay Hammond, "who laments the
fact that he permitted the ... personal income tax to totally be
removed from the books; he felt ... he should have suspended
it." Nonetheless, Representative Hudson said, people in Alaska
have paid no [state] income taxes, have received a dividend, and
have watched oil [royalties] "build many of the wonderful things
that we have in the state of Alaska."
[There was a motion to adopt the sponsor substitute, but it was
already before the committee.]
Number 1845
REPRESENTATIVE HUDSON explained that his bill uses a flat tax
based on a percentage of the federal gross income. He'd tried
to make it as simple as possible, he said. It starts with 1
percent of the adjusted gross income in the first year, "so as
not to be too weighty on ... any taxpayer in the state of
Alaska." He estimated it would cost about $350 per household in
the first year, and would yield approximately $118 million in
revenue. It would then rise to 2.25 percent of the adjusted
gross income in the following years; based on an average salary
across the state, he suggested it would cost about $680 per
household in the second year, and would yield approximately $285
million.
REPRESENTATIVE HUDSON remarked, "By all of the figures that
we've seen, ... it would be about half of the taxes that were
paid by Alaskans under the old tax mechanisms, which was far
more complicated." He conveyed his belief that the average cost
per Alaskan household would be less than $900 for the new tax
liability. Even if there were a decreased PFD of $1,000 per
individual, households of two or more people would pay some
money for government services and still be able to spend the
remaining dividends.
REPRESENTATIVE HUDSON referred to a handout that compares
various proposals. He pointed out that the governor's proposed
legislation would bring in $350 million, but is predicated upon
the federal tax after deductions. By contrast, SSHB 199 would
bring in $285 million [after the first year], using a flat tax
based upon the adjusted gross income found on the first page of
the federal tax form. Allowable deductions change over time on
the federal level, he noted. He asked who is to say that a
deduction for a second home, mobile home, or other investment is
what Alaskans should adopt as the basis for taxation.
REPRESENTATIVE HUDSON explained that under SSHB 199, everybody
who receives taxable income will pay 1 percent in the first year
- even if the income is from a PFD; a $1,000 PFD would require a
tax of $10. He remarked that it would be the first "tax back,"
which former Governor Hammond has indicated he believes is one
element the state should look at: "If you want to take some of
the permanent fund money, rather than capping it, tax it back."
A child's PFD is now included in the adult's income tax,
Representative Hudson added, "and so it would still essentially
be tapped."
Number 2010
REPRESENTATIVE HUDSON continued:
Somebody mentioned, "What about rural Alaskans who pay
no taxes, who receive exceptionally high governmental
money for education, for example, on a per-student
basis?" I heard [it's] something like $20,000 per
student in certain ... districts. This would at least
begin to take some of that money back.
How does it treat nonresidents? There are 65,000
nonresidents that are employed in ... Alaska in ...
the year 2000. Those 65,000 nonresidents took home -
to their states of Washington, Idaho, wherever they
came from - ... something close to $905 million,
paying not one thin dime to the State of Alaska.
Mr. Chairman, we believe that they should start
paying. We believe at 1 percent, that would cost them
approximately $9 million; at [2.25 percent] it would
be ... close to $20 million dollars. ... Again, from
my good friend [former governor] Jay Hammond, we can't
let these people come up here, take the bounty of the
State of Alaska, incur costs to the State of Alaska in
the form of health and social services and education
and corrections and ... things of that nature, and not
pay a portion of that. So this would begin to at
least take some of the money that is leaving the state
... and bring it back in....
Number 2075
REPRESENTATIVE HUDSON mentioned asking for a model to get ideas
as to how the bill would affect Alaskans. He said the data was
based on the 1999 tax year. He referred to a handout in the
committee packet, "% of Adjusted Gross Income," which shows in
the top left box the [target revenue] amount of $285 million.
Representative Hudson asked committee members to look at the $0-
to-$20,000 range, which shows that 142,308 households paid
approximately $24 million of that $285 million. He continued:
If you follow it across, you can see how much each one
of these tax categories of the adjusted gross income
would end up paying. So it runs all the way from $24
million at the bottom end to $87 million at the top
end. And that, incidentally, is essentially what is
done by all the other tax measures, as well.
REPRESENTATIVE HUDSON referred to the governor's bill, which he
said was presently before the committee. He continued as
follows:
It would run at the lower end, $11 million of [$]350
[million] to $165 million at over [$]100,000. And
incidentally, I went back and I modeled the last one
that the governor had put together, as well. And I
think one of the reasons that the legislature in its
wisdom chose not to take up the governor's proposal
that he submitted several years ago was - at least
what I heard from my colleagues - was that it took far
too little from people at the low end of the spectrum
and far too much [from] the high end of the spectrum.
So, what we've tried to do was to pick a method that
balanced it out to the extent possible. Those people
[who] make more [money would] clearly be paying more
of the bill. But people at the low end of the scale,
too, also receive most of the services and should pay
... part of the cost.
REPRESENTATIVE HUDSON suggested, in essence, that legislators
could do various things with the figures. If the 1 percent is
not favored, it can be eliminated, and the decision to "start
it" next year, for example, can be made. He said, "You get less
money; you don't get that $100 million first year." He
explained, "We put that in there because there is going to be a
cost of setting up the tax mechanism. We're going to have to
pay money in order to set this whole monster back up there."
Number 2195
REPRESENTATIVE HUDSON disagreed with the governor's fiscal note,
which shows $12 million in the first year, dropping to
approximately $7.5 million thereafter. He said he'd like to "go
back to the governor's last fiscal note," which was included
with [the governor's] own bill and was only about $3.5 million.
Speaking as a member of the House Finance Standing Committee
that will be the next to hear [SSHB 199], Representative Hudson
said whatever "we" do, he would make certain that the cost is
not inflated.
REPRESENTATIVE HUDSON referred to a copy of the [Internal
Revenue Service (IRS) Form] 1040. He said, "My tax applies to
line 33 on the 2001 and - I suspect it'll be - the 2002 tax
form. So anybody in Alaska will be able to look at line 33 and
take 1 percent of that."
Number 2241
REPRESENTATIVE JAMES surmised that the tax returns being
identified were those with an Alaska address, as opposed to any
Alaskan residents who are filing a federal tax return with a
"different address." She said she thought [a category] that was
being left out was all those people who worked in Alaska "not
full-time" and have other income in other states for which they
file a tax return - the same people who "we're hoping to be able
to help us to pay." She asked, "How do you include them in this
tax return, and how do you differentiate between Alaska
residents and nonresidents with Alaska income?"
REPRESENTATIVE HUDSON mentioned deferring to [Neil Slotnick of
the Department of Revenue]. He added, "I think we take a
percentage of it, so that whatever percentage of their income is
made in ... Alaska is taxed by the State of Alaska."
Number 2301
CHUCK HARLAMERT, Juneau Section Chief, Tax Division, Department
of Revenue, offered that Mike [Williams, who was online from the
Department of Revenue] would be a better person to answer
regarding revenue impact of residents and nonresidents. He
continued as follows:
In all three of the bills, essentially, the treatment
of residents and nonresidents is the same, in terms of
if you're a resident, we tax you on all of your
income, and then if you happen to have business in
another state and are taxable there, we'll give you a
credit based upon the taxes you pay the other state.
And that's pretty much the same through all the bills.
Similarly, if you are a nonresident, we tax you on the
income that is deemed to be earned in Alaska. That's
the difference. ... The differences between the three
bills on ... that issue is how you make that
determination. And the only difference between the
three bills is, in essence, how you calculate the
fraction of income that is earned in [Alaska].
TAPE 02-10, SIDE B
Number 2389
MR. HARLAMERT concluded that fundamentally, there isn't a great
difference.
REPRESENTATIVE JAMES followed up:
However, since this tax is based on the adjusted gross
income, you don't have playing with the numbers on the
rest of getting to the tax in this one, as you would
in the other, because where you'd have to have whether
property tax from another state is deducted from your
federal [return] - and that wouldn't be allowed -
and/or any other business expenses.
And that's one of the concerns that I have, is the
2106 - the types of deductions at the federal level
for people who may have some expenses working in the
state - how does that relate, because now the 2106
doesn't come on the front like it used to; it comes on
the ... itemized deductions.
MR. HARLAMERT said he thought Representative James was correct
that when the tax is apportioned on the federal tax,
incorporated are all of the deductions inherent in the federal
tax liability. He added that when "you don't go that far down
your tax returns" and stop it at adjusted gross income, one
avoids any impacts of ...
REPRESENTATIVE HUDSON offered, "Second homes in Washington
State."
MR. HARLAMERT said yes.
REPRESENTATIVE HUDSON noted that he was working with two
different [bill] versions and was "becoming educated " as he
proceeded. He continued as follows:
On page 4 of the draft that you've now adopted
[Version J], it does cover the ... credit under (a) of
this section for a nonresident, which multiplies the
tax computed by a fraction, the numerator of which is
the income derived from sources in other state[s] or
territories.
REPRESENTATIVE HUDSON offered his belief that this was how it
was done in the past. He urged members to consider how
complicated to make it. He noted that on the second page [of
the federal return], deductions are in constant flux, even in
Washington, D.C., where there is talk about reducing taxes and
giving numerous credits. He told the committee:
I think we're better off to do something that is a
very small percentage of whatever the actual wage is
on the bottom of this whole thing - a very clear,
straightforward, flat tax. And then you don't have to
worry about the question of whether or not somebody
from California is up ... here and going to go ahead
and try to claim - through the federal tax mechanism,
at any rate - all of these other adjustments and end
up [with] Alaska holding the bag.
We want to try to get a fair return on any and every
wage that's earned in ... Alaska before all of these
political exemptions and other manipulations that are
taking place by the federal government [occur]. We
don't want to be [controlled] by the federal
government. That's the reason that I put this
substitute in.
CHAIR COGHILL said, "And as I understand it, then,
Representative Hudson, the ability for us to start the laundry
list of exemptions and/or deductions would be -- we'd end that
argument."
REPRESENTATIVE HUDSON concurred.
Number 2245
REPRESENTATIVE JAMES said, "I agree with the department."
REPRESENTATIVE HUDSON mentioned a fiscal note prepared [for] the
governor by the Department of Revenue when he put forth his tax
bill forward a couple of years ago.
Number 2209
REPRESENTATIVE STEVENS told Representative Hudson he appreciated
the clarity of the charts he'd provided. He referred to the
bottom line and asked Representative Hudson if it was his
understanding that if nothing is done, the impact on the
permanent fund dividend (PFD) will be a regular reduction.
REPRESENTATIVE HUDSON said yes, indicating that was [the
testimony of] "experts in the House" two days ago.
Number 2185
REPRESENTATIVE JAMES mentioned seeking a fiscal solution. She
said the big boon that [the state] had - and the big surplus
provided at the federal level - was not a surplus from the
increase from tax conditions, but was because more people were
making more money. She said she was not convinced that the
amount of taxes that can be collected from the existing earners
in [Alaska] can be sustained without higher wages, more workers,
and increased revenues - not by raising the tax rates, but by
having more people pay. She added, "If I'm going to be
supporting any kind of taxes at all, we have to have some ...
method of addressing how we're going to get more people making
more money in the state."
Number 2130
REPRESENTATIVE HUDSON concurred. He added, "I hope, at any
rate, that we would see that this is an element that will begin
to make the connection between expanded workers in the state of
Alaska and the expanded costs, and how it's going to be paid
for." He then mentioned "the Alaska disconnect" - that if the
economy in Alaska is increased and numerous people open up
businesses - a microchip factory in the Matanuska Valley or
building General Electric dishwashers in Fairbanks, for example
- the increased number of people coming into the state will also
increase the burden on services those people require, such as
schools. He noted that those people pay nothing; therefore,
they cost [the state] money and "dilute our dividend." For
example, if there were 10,000 more people, everyone's dividend
would be proportionately less. Representative Hudson said he
agreed with [Representative James], but had wanted to add that.
Number 2068
REPRESENTATIVE FATE said both [Representative Hudson and
Representative James] were correct, but bringing in more people
requires more jobs and a condition in Alaska that is "friendly
to the increase of industry and businesses." He suggested that
whenever [the legislature] discusses taxes of any kind, it must
also discuss state spending and fiscal restraint.
REPRESENTATIVE HUDSON concurred.
Number 2021
CHAIR COGHILL offered that the "upward pressure of this year's
budget would only just fill the expansion of our government, or
very close to that." He said that troubled him; it would be
hard to go to his constituents and say, "Well, we'll expand it
with this tax, and then next year we'll start biting into the
deficit." Referring to a previous comment by Representative
James, he said, "We've got to take our hands off some of the
places where we've made it harder for businesses to grow in
Alaska."
Number 1998
REPRESENTATIVE JAMES mentioned previous comments by
Representative Fate and Chair Coghill regarding spending. In a
state with 100-percent control over all the resources and how
business is created, she said, it will be difficult to make
money "in those areas," because there are insufficient employees
to provide prompt service to requests for permits, for example,
to help people understand that [Alaska] is "truly open for
business." When decisions regarding budget reductions and
decreased spending are made, specific areas need to be
considered as well as the overall picture, she said, to decide
how to create a [business-friendly] atmosphere.
Number 1938
CHAIR COGHILL noted that as the chair of the resources
subcommittee of the House Finance Committee, [he'd] heard part
of that discussion the prior day.
REPRESENTATIVE HUDSON said he thought "we're all on the same
page in that respect." He mentioned the attempt to constrain
growth of government and cited the following examples of growth:
a cost-of-living increase, more students entering schools, the
increase of the senior population, and more Medicaid recipients.
As mentioned in the prior day's subcommittee meeting, he noted,
the balance is now being discussed over whether to keep parks
open in Alaska, as opposed to "putting more money into
geological engineers and accountants to make certain that the
state receives the maximum amount of money from the sale and
discovery of our oil" and the gas line, for example.
REPRESENTATIVE HUDSON described himself as an optimist. He
mentioned trying to fill the gap, slowing down consumption, and
preserving the PFD to the extent possible. Regarding the
latter, he opined that he did not think "we can do it
altogether," and remarked, "You'll hear that next Saturday." He
agreed regulations must be cleared up to ensure that private
industry can "step forward, invest their money, create jobs, and
make a profit." He concluded that [the legislature] is faced
with a big job, and that this [proposed legislation] is just one
small step to try to fill "an emergency gap."
CHAIR COGHILL offered his appreciation and noted that as the
chair of the House State Affairs Standing Committee, his
reluctance to tax is based on a reluctance to restrain the
growth of government, which he said is a difficult thing to do.
He said he hoped this would show him the details of where the
money will come from and how to constrain "ourselves" so that
the state doesn't go further into debt.
CHAIR COGHILL referred to [page 2, lines 11-13, Version J],
which read:
An individual whose income includes a cost-of-living
allowance that is exempt from the federal income tax
shall determine and include that amount as part of the
individual's taxable income as if the cost-of-living
allowance were not exempt.
CHAIR COGHILL asked how that is possible.
REPRESENTATIVE HUDSON said it can be done because "our" taxes
are entirely different from the federal tax. The federal tax
laws exclude the federal cost-of-living [allowance], which
varies, he thought, between 18-25 percent and used to be a flat
25 percent - every [federal] employee from [another state] that
came to Alaska received an untaxed 25 percent cost-of-living
allowance. He said "we" think that is part of the income. He
offered, "If they can get a deduction from the federal
government, that's fine." He added, "Now, if we go to the
second page, then they're going to get the credit for that,
because it's in the federal makeup."
CHAIR COGHILL agreed the flat tax is "probably the best place to
do it, because it's the simplest and you pay on your ability to
earn." He said his concern about an income tax regards putting
a downward pressure on the workforce. He asked Representative
Hudson if he anticipates that "this percentage is going to
throttle us back."
Number 1741
REPRESENTATIVE HUDSON suggested that is an area the committee
may want to consider. As the author of the bill, he said he
wouldn't have any problem whatsoever in finding an "exemption to
the trust," because he was in the legislature when it passed the
legislation to encourage more trust management in the State of
Alaska. He said it does accrue a profit to the state. He
suggested [the legislature] needs to consider whether "taxing
that element" would drive that business to "some far off
island," for example.
REPRESENTATIVE HUDSON said he hadn't addressed that in the
current draft before the committee, but would consider it before
the next hearing. He offered [cooperation] with Chair Coghill,
the chair of the House Judiciary Standing Committee, and others.
CHAIR COGHILL said he wanted to consider that issue.
Number 1703
REPRESENTATIVE JAMES mentioned discovering whether there is a
way to separate trusts made Outside from trusts made in Alaska.
REPRESENTATIVE HUDSON responded, "Good idea."
Number 1692
CHAIR COGHILL asked [Representative Hudson] how he perceives the
process in regard to employers, the state, and the
administration.
REPRESENTATIVE HUDSON replied that there would be no withdrawals
by the employer in the first year. He said it was his
suggestion that the tax commence on January 1, 2002 -
essentially, retroactively - and that it be 1 percent of the
adjusted gross income. He mentioned notification to everyone
and said, essentially, the forms and setup would have to be
undertaken [by the Department of Revenue] from the date that
this was passed into law.
REPRESENTATIVE HUDSON listed the following items for which [the
Department of Revenue] would be responsible: electronic
computations, worksheets, system changes, schedules, and
communications. He said that is why it's only 1 percent in the
first year - it covers the cost of the complete setup, while
still providing a surplus, he believes, "even at their figures
of about ... $80-$90 million, to actually start applying against
that debt."
REPRESENTATIVE HUDSON explained that the debt will not be
appreciably affected in the first year' it will be necessary to
use the Constitutional Budget Reserve (CBR) for the difference.
In the second year, employers would have the forms; the
department would have set up the mechanisms; withholding would
take place on a periodic basis; and the money would flow to the
Department of Revenue. He said he presumed that individuals
would file "the appropriate page of their federal income tax, or
their adjusted gross income, or their W-2 forms."
Representative Hudson emphasized that he would need to have this
discussion with the Department of Revenue, once [SSHB 199]
appears to be moving forward.
CHAIR COGHILL mentioned not being able to track certain things
as other states do because Alaska does not have state income
tax. He mentioned going to an adjusted gross income, which he
said is a flat tax; he said it would give a different look at
the economy from looking at the federal tax liability, for
example. He asked Representative Hudson if he'd thought about
what that would do regarding the provision of services.
REPRESENTATIVE HUDSON said he had not.
CHAIR COGHILL opined that because Alaska provides so many
services, "this is going to give us a look into the economy that
we haven't had for the last 20-some years."
REPRESENTATIVE HUDSON agreed it will give Alaskans an
"ownership" in the services provided on their behalf. He added
that people would be able to look bureaucrats in the eye and say
they want to make sure their tax dollars are being used in the
most cost-efficient way. Presently, he said, the people pay
nothing and receive everything; therefore, there is no downward
pressure on those who [the people] elect to make laws. He
concluded that "this will certainly provide that nexus between
the taxpayer and the government."
CHAIR COGHILL said he thinks there is a nexus. He offered a
counterpoint view that "just using some of the earnings of the
permanent fund has been such a political pressure that it has
driven us right to this very discussion."
REPRESENTATIVE HUDSON said that would be a major part of the
discussion in [the upcoming hearing on Saturday, February 23].
Number 1452
REPRESENTATIVE JAMES offered her belief that making [the bill]
retroactive would be wrong because people would object to
"having had it be taxed for something that they didn't know was
taxed when they got it." She urged having an effective date of
January 2003 and implementing the withholding concurrently. She
recalled federal laws when her husband had to start paying on 85
percent of his social security, which was a substantial,
unexpected expense.
Number 1390
REPRESENTATIVE JAMES referred to a recent visit by "the Close-up
students" who'd met with her in her office. She explained that
these are kids who want to be involved in government and have a
say in how the country is run. She said the system is flawed,
but it is the most perfect system that exists and gives people
the chance to be involved. She added, "It is a government 'of
the people, by the people, for the people,' and it's the
'people' part that's not working, when you can't even get 50
percent of the people to be informed and go to the polls to
vote."
REPRESENTATIVE JAMES noted that her staff checks the district
and party of those who issue a complaint, for example; she said
it is amazing how many of those people aren't even registered
[to vote]. She said if the public wants to have a say in the
government, they need to participate. She offered her belief
that people should pay for some of the services they want and
that "they will be more interested in how they are affected."
She thanked Representative Hudson for bringing this legislation
forward.
CHAIR COGHILL asked for a definition of the word "situs", found
on page 3, line 25 [SSHB 199].
REPRESENTATIVE JAMES defined "situs" as "where it's located."
Number 1289
REPRESENTATIVE WILSON referred to previous discussion regarding
the deficit's being so large that "we can't cut our way out of
it, and we can't tax our way out of it, and we can't grow our
way out of it, so we have to do a combination of all three."
She stated that in many areas of [Alaska], despite growth and
employed people, the pay for employees is less than in the past;
therefore, [the legislature] needs to consider how to grow the
economy in ways that can afford people to make a living.
Number 1229
CHAIR COGHILL mentioned "the move for the Great Society";
Medicaid and Medicare; and a greater and stronger centralized
government in the 1960s. He continued as follows:
Many times, we in the state have felt the rebellion,
if you will, of that that has come to us as a state,
and we've had to swallow a lot of things here in the
state, and - myself included - kind of resist that
growth to a stronger, centralized and more subsidized
world, where we're actually changing money from one
group of people to another, and we're doing that
redistribution that has such a socialist kind of
background to it.
So many of us are so reluctant to continue that type
of government growth that when we come to these
discussions, it's very painful for us to just wave it
off, even though we know we have the need. But how do
we change the form of government from going further
down that road, and maybe recovering back to a free-
market economy where we're balanced out by competition
and the individual liberties?
Number 1148
REPRESENTATIVE CRAWFORD mentioned being affected by stories he
has heard from people, most of whom were "at the very bottom."
He related one story of a retired, widowed lady who lives in a
condominium close to his own home, who told him the income she
receives through social security and a longevity bonus is spent
on rent, while the money she receives from the PFD is [what she
has to spend on food]. He mentioned [Representative Hudson's]
"starting this out based just on adjusted gross income." He
said he understood that [Representative Hudson] wanted everyone
to pay his/her share, but said [this proposed legislation] would
[affect] those people at the bottom.
REPRESENTATIVE HUDSON mentioned various tax forms. He surmised
that the lady of whom Representative Crawford had spoken would
use tax Form 1040EZ. He offered his belief that there are
liberal exemptions for social security benefits, and that for
those who only have social security, it is often not taxed at
all. He indicated he has to pay taxes on his own social
security because of his legislative salary.
REPRESENTATIVE CRAWFORD related a story of a single mother who
works at Kmart stocking shelves for just under $8 per hour, who
has to struggle each month to pay rent and buy food; any type of
medical bill is [difficult to pay]. He asked Representative
Hudson how this [proposed legislation] would affect her.
REPRESENTATIVE HUDSON answered that he did not know. He said
the focus had been on the wage issues and the thought that
everybody should pay "a very small percentage." He explained
the reason that he'd made the change from 15 percent of taxable
income or tax that a person would pay to the government, to 2.25
of a person's adjusted gross income - he'd thought that was the
fairest place to "begin your deduction from." Referring back to
the story of the mother, he suggested that Representative
Crawford could certainly contact somebody from the
administration to satisfy his interest.
REPRESENTATIVE HUDSON said his concern is that [the legislature]
does not get "led down that path" of trying to find "some sort
of special exemption for every type of special exemption." He
said there has been concern expressed regarding people in rural
Alaska receiving benefits without paying anything. He said, "If
we pass this bill, every dollar that they receive on the
permanent fund dividend, for example, would become part of the
taxable income amount - if it fits into that ... line on the
federal income tax return - and will become taxable at that very
low rate."
REPRESENTATIVE CRAWFORD said he would remember that talk [with
the woman] at her doorstep for the rest of his life, because she
was "at her wits end." He said he didn't want to put a greater
burden on her.
REPRESENTATIVE HUDSON urged Representative Crawford to look at
that as it applies to the bill, and said he would do the same.
He mentioned health and social services, which is one of the
largest costs to the state and covers everything from adults'
and children's medicine and foster homes, for example. He
suggested the need to "fill in some of that [budget gap] before
we run out of our savings account, so ... know, the people at
the low end will pay the least and receive the most." He added,
"I think that's just a fair assessment."
Number 0802
REPRESENTATIVE JAMES, regarding the PFD, said it didn't make
sense to her to give with one hand and take it away with the
other. She emphasized that she has absolutely no interest in
making the PFD a welfare program; consequently, she stated her
belief that everyone who qualifies should get the same [amount].
She opined that it would be simple to reduce the PFD by 1
percent, "if that's what we wanted to do, and we're already
there, and that person doesn't even have to file a tax return."
She recommended considering the simplicity of this issue, if
"we" really want to get money and then take it from everyone,
"and just not make them have to file, if they don't have to."
Number 0720
CHAIR COGHILL said, "And the cost would be either between $3 and
$13 million dollars less."
Number 0689
REPRESENTATIVE HAYES pointed out the need to discuss another
issue: that the legislature only controls one-third of the
budget - the $2.3 billion or so in the [general fund] - whereas
approximately $2.1 [billion] comes from the federal government
and $1.7 [billion in the permanent fund] is given away, "and we
do an inflation proofing [of] the permanent fund."
Number 0572
CHAIR COGHILL mentioned "federal strata" of income, federal
employees, the [U.S.] Department of Defense, and the Bureau of
Land Management that owns and operates at least two-thirds of
the land in Alaska. He said certainly the Tongass National
Forest has been out of "our" control. He noted that he'd
recently heard that 10 percent of the state land is beetle-
infested forest. He said "we" have some significant issues, and
he agreed with Representative Hayes that this all has to be part
of the discussion.
Number 0478
NEIL SLOTNICK, Deputy Commissioner, Office of the Commissioner
Department of Revenue, noted that Mr. Harlamert was also present
and that [online was] Mike Williams, a revenue auditor. Mr.
Slotnick thanked the committee for having this discussion.
Having an unbalanced budget is an unstable situation for the
economy of Alaska, he said. An unbalanced budget is a deterrent
to investment, because it may be that the state would have to
"balance the budget on the backs of business."
MR. SLOTNICK told the committee that he had testified the day
before against a gross-receipts tax. He explained that he does
not like to testify against any revenue measure; however, [the
department] did not think that was a business-friendly tax.
[The department], he said, believes a broad-based tax is needed
to go forward and balance the budget.
MR. SLOTNICK referred to a chart prepared by Mr. Harlamert,
which summarizes some of the differences and similarities
between the three proposed income tax bills. [The three bills
compared on the chart are: HB 413, the governor's bill; SSHB
199, Representative Hudson's bill; and HB 10, Representative
Moses' bill.] Pointing to the first [attribute], "Tax Base," he
said, "The tax base for the governor's bill and for
Representative Moses' bill is 'federal tax liability,' whereas
Representative Hudson has proposed that we use as the tax base,
'adjusted gross income.'"
MR. SLOTNICK noted a third possibility on [Form] 1040, which is
"taxable income," found on line 39. The difference is that
taxable income includes the exemptions and the deductions. He
indicated exemptions are for oneself and one's dependents. With
adjusted gross income, he noted, "the wage earners who have
dependents - whether it's children or elderly dependants - there
is no exemption provided for that." He continued:
Now, when we go to the governor's bill and
Representative Moses' bill, I've said, ... the tax
base there is federal tax liability. But it is
actually not clear to us, as we read HB 10, ... what
the tax base really is, because federal tax liability
-- first you figure out your tax from the tax tables;
is that federal tax liability? After you've figured
your federal tax, then you look and see whether you
get any credit to apply against that tax, before you
end up writing your check or requesting your refund.
Now, I believe Tim [Benintendi, in earlier testimony
that day on HB 10] said he interpreted ... HB 10 to
apply to the amount that you owe, which would be line
70 here on your ... [Form] 1040. I don't think that
can be right, because that's after withholding amount
that you owe, when you go all the way down there.
So, what the governor's bill does, is it takes line
52, which is, "You can go to the tax tables, compute
your tax, then subtract any credits that you may have
- and this would be credits for things like ... a
childcare credit, which is a credit that's designed to
encourage people to enter the workforce and not have
to absorb all of the cost of childcare. There's
various other credits, including certain business
credits that are included within that. That's line 52
- tax after credits. And so that's what we call
federal tax liability. It's not clear to me if HB 10
goes to line 52, or if it just goes to line 39, which
is taxable income.
But that helps focus, I think, for this committee, the
policy decisions that you are going to have to make.
Do you go to AGI [adjusted gross income] - and we've
heard arguments from ... Representative James and from
Representative Hudson as to why AGI has ... has some,
I believe, ... compelling arguments in favor of that.
It is the simplest and perhaps the broadest.
But we've heard from Representative Crawford why it
would be ... what I would call "more encouraging, more
friendly to the people entering the workforce or in
the margins of the workforce" - a tax base that's more
friendly towards those people at the edges. And I
would submit to you that line 52 is the most friendly
to those who are trying to enter the workforce.
You could also look, however, at line 39, "taxable
income."
Number 0043
REPRESENTATIVE WILSON noted that for people who don't do their
own taxes, this information could be confusing. She asked Mr.
Slotnick if he could provide examples, such as a single mother
or a family of four.
MR. SLOTNICK said he thought he could provide the examples by
Tuesday [February 19].
TAPE 02-11, SIDE A
Number 0001
CHAIR COGHILL urged members to keep the conversation focused so
that when considering all three [tax bills], they will have
before them all the best information regarding the heading of
"income tax."
MR. SLOTNICK said that information could be made ready by Mr.
Williams. He also noted that Mr. Persily [Deputy Commissioner]
would be present at the Tuesday [February 19] hearing.
MR. SLOTNICK moved on to the attribute entitled "Tax rate." He
continued as follows:
One of the big questions in rate is, "Do you want to
graduate a rate, or do you want a flat tax?" Now, ...
the governor's proposal ... takes a flat tax on
federal tax liability, and that picks up the graduated
rates that are within the federal system. Graduated
tax rates are very common. Most states that have
income taxes have graduated rates.
Certainly, we're all familiar with the federal system.
And the way it works, I think, as Representative
Crawford pointed out, is that for everybody, your
initial income - first ... $7,000 - would not be
subject [to] tax. And then your next ... dollars
earned would be subject to the lowest tax bracket,
which used to be 15 percent, and it's ... going down
now. And then your next, again, incremental ...
graduations, so that there's no ... penalty for moving
into the next bracket.
And, again, Representative James has argued very
eloquently what she sees as the advantages of a flat
tax. ... But I would want to just put on the record -
and I think that Representative Crawford has expressed
it - that the advantage of the graduated rates is that
those who are in the higher brackets are earning more.
They're able to take more advantage of the advantages
of civilized society in which we are all able to live
and work, and they are left with more disposable
income, even after the effects of the graduated rate,
which now, with the federal rates as they are - and
we're just piggybacking on the federal rates - the
graduations are not nearly what they used to be,
either with the federal rates or with the old Alaska
law that we repealed.
Number 0235
CHAIR COGHILL mentioned the complexity of the federal law and
changing the complexity of the state law. He asked Mr.
Slotnick, "Do you sidestep that discussion?"
MR. SLOTNICK answered yes. He indicated an assumption that the
policy behind the federal tax changes are, in general, "adopted
here." For example, he stated that in the future there will be
an additional child tax credit, which "we" would [adopt];
however, he said if there were policy changes in the future that
legislators don't want, then amendments can be made.
Number 0300
REPRESENTATIVE FATE asked Mr. Slotnick for data regarding "the
ratio of discretionary income to gross income" and whether
people with low income have less discretionary income."
MR. SLOTNICK replied that he would try to "work that up";
however, that is a broad policy, more of a "common-sense notion
that we have there."
REPRESENTATIVE FATE responded, "Regardless, whether it's common
sense or not, I know people with high incomes that have very,
very little discretionary income, and people with low incomes
that have a lot of discretionary income. I would like to see
some data on it - that's all I'm requesting."
MR. SLOTNICK responded that he would try to fill Representative
Fate's request; however, he said he had never seen statistics
published on discretionary income.
Number 0380
REPRESENTATIVE HAYES stated his appreciation of the work done by
[Mr. Slotnick's department] regarding this issue. He mentioned
property owners who pay property taxes for education in their
communities. He asked, "Have you all thought about including
some type of credit, as in Representative Moses' bill, and how
much money would you actually lose by doing that?"
MR. SLOTNICK answered that the question had been discussed
previously. He said that is one advantage of [adopting as a
basis] the federal tax liability, because there is a deduction
for state taxes paid when computing the federal tax liability.
One reason that a property tax credit - such as Representative
Moses included in [HB 10] - was not chosen is that there is
"some double counting when you add up credit on top of taxes
[that] have already been deducted," he added. He continued:
I know when I was a renter, when the local property
taxes here in Juneau went up, my rent bill went up.
So that really, if you're renter, you are paying what
I might call "an imputative property tax," and yet
that person isn't going to get to take advantage of
the credit, or even the deduction. So, in some ways,
... we believe that having a one-for-one property tax
credit is unfair to that portion of the population
that isn't a homeowner.
The final reason that we did not go with a property
tax credit is that the Department of Law questioned
the constitutionality of allowing a property tax
credit only for property tax paid in the state. There
is a line of cases that is very clear in taxation -
that you cannot discriminate against nonresidents.
And the federal courts are very vigilant about
enforcing discrimination problems that they see in
state taxes.
Now, I don't know that the Department of Law ever
reached a conclusion on that analysis. The question
was raised. It was a significant enough question that
we chose not to go there in our analysis.
Number 0549
MR. SLOTNICK referred to Representative Hayes' question
regarding how much the property tax credit costs the state. Mr.
Slotnick said that number is in the fiscal note for HB 10; the
revenue raised by HB 10 is on the last page of the analysis.
[Mr. Slotnick was searching for the exact information as he was
talking.] He said, "I can get back to you on that."
CHAIR COGHILL said he'd been looking more towards a comparison,
rather than delving into [Representative Moses' bill], because
Representative Moses would be given [time to present his bill]
in the following week. Chair Coghill mentioned an adjusted rate
based on "some of our accounts" that was different in "your
bill" than in any other. He said it was a fundamental issue.
He also mentioned a "trigger mechanism" he has been intrigued
with, and figuring a tax-base rate based on "where are we at
with some of our larger accounts, like the CBR and the earnings
reserve."
Number 0670
MR. SLOTNICK addressed that as follows:
What we've done in the governor's bill is, we've put
in a trigger based on the size of the Constitutional
Budget Reserve. ... At the Department of Revenue, we
recommend that we ... not let the budget reserve go
below $1.5 billion. We think we need that much money
in there to act as a shock absorber, [in case] there
is a sudden plunge in the price of oil, because even
if we have a broad-based tax such as this, and even if
we have other tax revenues to balance the budget,
we're still, even in the future, going to be dependent
upon oil revenue - a very important part of the
state's budget.
MR. SLOTNICK reiterated that the CBR acts as the shock absorber,
which he believes is part of the reason the voters enacted it.
He said [the department] highly recommends that the CBR stays at
$1.5 billion; once it begins to climb above that, some tax
relief can be provided to Alaskans. To provide a buffer, he
explained, the "trigger" was put in the bill at $2 billion, at
which point the tax rate "on the citizens" could be cut down to
10 percent. Furthermore, if [the CBR] reaches above $2.5
billion, the tax would be lowered to 5 percent, he said, which
is "something to hold the tax in place, rather than just do away
with it." He explained that [the department] would not want to
be in the position of laying off employees one year when the tax
is abolished and then having to rehire them the next year, for
example.
Number 0772
REPRESENTATIVE JAMES said there is a payback requirement on the
CBR. She asked how Mr. Slotnick can support the CBR as
currently drafted and not "pay it back up to ... the payback
before you stop taxes."
MR. SLOTNICK responded that he didn't believe the payback
provision was an imperative demanding that the state tax its
citizens such that it get back to the $6 billion figure that is
owed to the CBR fund.
REPRESENTATIVE JAMES said, "That's what I voted for. I mean,
were you out there voting for the CBR? What did you think it
did?" She said [the CBR] "does things that I didn't think it
did," but explained what she thought one of [the CBR's]
functions was as follows:
This was a fund that was going to be coming from the
windfalls, sort of. They would identify windfalls,
which to me weren't really truly windfalls, but what
they were is "bump-ups" in the budget, so we didn't
spend too much: "Let's cap that off and put this in
here, and we can utilize that when we need to. And
then when we have the money we have to pay it back."
REPRESENTATIVE JAMES said the "paying back" was a very important
part of keeping the pot of money, when she'd voted for [the
CBR]. She added her belief that many people felt the same way.
MR. SLOTNICK described an example of a circumstance whereby
[Alaska] had a gas line and, as a consequence, surplus revenue.
That, he said, is when the CBR fund would be paid back and when
it would grow. He said he did not want to do anything to
inhibit that growth of the CBR back to its "full payback."
However, Mr. Slotnick reiterated, he didn't think it necessary
to tax the citizens at the highest rate "we could stand" solely
to replenish the CBR to an amount higher than necessary to act
as a shock absorber, although a certain minimum amount is needed
as a shock absorber to avoid the type of sudden fallout in the
economy seen in 1986 when oil prices plummeted.
Number 0910
REPRESENTATIVE FATE clarified for any listening public that a
gas pipeline would not put the same kind of money into the state
coffers that the oil pipeline did.
Number 0955
REPRESENTATIVE JAMES suggested the real benefit of having the
gas line [would be] to have more high-paying jobs and the other
kinds of industry that it might support, not the revenue
received at the state level from "the taxes on the oil company."
CHAIR COGHILL noted that one of the policy discussions that
would be heard when the governor presents his bill regards the
difference between the base rates - "how we attach ourselves to
the federal government," whether by flat tax, graduated tax, or
a combination. He indicated there may be discussion on
exemptions. He added that if the discussion did not happen,
then exemptions would become a moot point, except that the
committee would be talking about the cost-of-living allowance
(COLA), for example. He expressed interest in "the trust
doctrine discussion."
CHAIR COGHILL said he thinks although the House Finance Standing
Committee is better equipped to deal with the expected revenues,
the [House State Affairs Committee] should set parameters,
perhaps by stating its expectations of the administration.
Number 1052
REPRESENTATIVE HUDSON requested that the committee ask the
department to consider - on all three "approaches" - the amount
of money that would not be flowing to Washington, D.C. He made
note that the governor, in his State of the State [address],
said that "if we impose this tax, $50 million that people of
Alaska now pay to the federal government would stay in the State
of Alaska." He added, "And I think each one of these mechanisms
would have some relevance there, and I would appreciate that."
CHAIR COGHILL said that was a good point which he appreciated.
He asked Mr. Slotnick if [the committee] could expect that from
him.
MR. SLOTNICK answered yes.
Number 1128
REPRESENTATIVE STEVENS referred to the aforementioned issue of
whether it is legal to give a benefit for property taxes paid in
the state and not those paid out of the state. He said that is
a legal question that he would like to know more about.
Number 1149
REPRESENTATIVE JAMES said her understanding and her perspective
were to "only give a credit on the education." She said she
believed that could be called a "school tax," paid either
through property tax or income tax. She added, "It could be
even identified to be the $100 that I hear all of the state
people proposing to do." Representative James suggested $100 of
"that bottom line" could be assigned as a school tax to give a
refund for those people who, "in their personal residence, pay a
property tax that is allocated to schools." She said she did
not see anything unconstitutional about that.
REPRESENTATIVE STEVENS remarked that he'd appreciate further
discussion of that issue, from a legal standpoint.
CHAIR COGHILL commented that he would be interested to find out
how an exemption might be provided for those who "pay their own
schooling at home." [SSHB 199 was held over.]
ADJOURNMENT
Number 1208
There being no further business before the committee, the House
State Affairs Standing Committee meeting was adjourned at 10:00
a.m.
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